Introduction to Public Sector:

It is known to us that public sector means and includes all those activities and/or functions
including the services which are performed, controlled or regulated or owned by the State
Government, i.e., the public sector comprises of State enterprises. Objectives of setting up Public
sector Unit

 To create an industrial base in the country

 To generate a better quality of employment
 To develop basic infrastructure in the country
 To provide resources to the government
 To promote exports and reduce imports
 To reduce inequalities and accelerate the economic growth and development of a country.
In India, a public sector company is that company in which the Union Government or State
Government or any Territorial Government owns a share of 51 % or more. Currently there are just
three sectors left reserved only for the government i.e. Railways, Atomic energy and explosive
material. Private sectors/players are not allowed to operate in these sectors.

Before the independence of India, there were only a few public sector companies in the country
this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the
Ordinance Factory are some of the major examples of the country’s public sector enterprises.

Role of Public Sector

The public sector plays a major role in uplifting the economic condition of society in various ways.
The major role of the Public sector can be explained below:

1. Public sector & capital formation – This sector has been a major reason for the generation of
capital in the Indian economy. A large amount of the capital comes from the Public sector Units
in India
2. Creation of Employment opportunities – Public sector has brought about a major change in the
employment sector in the country. They provide a lot of opportunities under various domains and
thus helps in uplifting the Indian economy and society.
3. Development of different regions – Establishment of major factories and plants has boosted the
socio-economic development of different regions across the country. Inhabitants of the region are
impacted positively with respect to the availability of facilities like electricity, water supply,
township, etc.
4. Upliftment of research and development – Public sector units have been investing a lot to
introduce advanced technology, automated equipment and instruments. This investment would
result in the overall cost of production.
5. Public Sector and Capital Formation: The role of public sector in collecting saving and
investing them during the planning ear has been very important. During the first and second five
year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11.
6. Employment Generation: Public sector has created millions of jobs to tackle the unemployment
problem in the country. The number of persons employed in the as on march 2011 was 150 lakh.
Public sector has also contributed a lot towards the improvement of working and living conditions
of workers by serving as a model employer.
 7. Balanced Regional Development: Public sector undertakings have located their plants in
backward parts of the county. These areas lacked basic industrial and civic facilities like
electricity, water supply, township and manpower. Public enterprises have developed these
facilities thereby bringing about complete transformation in the socio-economic life of the people
in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are
few examples of the development of backward regions by the public sector.
8. Contribution to Public Exchequer: Apart from generation of internal resources and payment of
dividend, public enterprises have been making substantial contribution to the Government
exchequer through payment of corporate taxes, excise duty, custom duty etc. gross internal
resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net
profit was 92,077 cr in 2010-11.
9. Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much
to promote India’s export. The State Trading Corporation (STC), the Minerals and Metals
Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan
Machine Tools, etc., have done very well in export promotion.
10. Import Substitution: Some public sector enterprises were started specifically to produce goods
which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics
Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission
(ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign
exchange by way of import substitution.
11. Promotion of Research and Development: As most of the public enterprises are engaged in
high technology and heavy industries, they have undertaken research and development
programmes in a big way. Public sector has laid strong and wide base for self-reliance in the field
of technical know-how, maintenance and operation of sophisticated industrial plants, machinery
and equipment in the country. Expenditure on research and development reduces the cost of
production.

Problems of PSUs

The major problems of PSUs can be stated below:

 Inappropriate investment decisions

 Improper Pricing Policy
 Excessive overhead cost
 Lack of Autonomy & Accountability
 Overstaffing
 Trade Unionism
 Under Utilization of capacity

1. Inefficient Management
It has been found that these enterprises are managed by public savants. They are not professionally
qualified nor experts in the management of industrial enterprises.
Public enterprises always suffer from delayed decision making.
Whereas, private enterprises are managed by professionals which makes them more punctual in working.
Private enterprises are operated for the profit motive, resulting in optimum utilization of available
resources.
Managerial dis-economies are there in public enterprises because of the lack of proper management cadre
in the public sector.
Public enterprises are usually managed by the bureaucrat. Organizational hierarchy, fix up responsibility,
the delegation of authority and management information system is the weak part of public enterprises.
2. Lack of Efficiency
They are not run on commercial principles. Their main motto is social welfare, not profit earning.
If a public enterprise in-cursed losses due to efficiency, it is overlooked. Whereas private enterprises are
run for profit.
Profitability is the man criterion of their efficiency.

It is assumed by the private sector that competition can be faced on the basis of efficiency.
Lack of competition is one of the causes of the insufficiency of public enterprises.

3. Delayed Decisions
Delayed in decision making is one of the key problems. Lack of personal interest No one wanted to take
responsibility for making decisions.
The loss in public enterprises is a loss of public. It is not a personal loss.
Therefore public enterprises have been undergoing losses and the number of losses is the mounting year
after year.

4. Lack of Innovations
Innovations are essential for economic development.
Public enterprise lacks it due to monopoly or lack of competition.
The private sector is always busy with innovating new techniques, new production methods, etc.
For the purpose of cost reduction and profit maximization.
On the other hand, public sector employees are government employees and their jobs are secure.
They do not bother about the cost and profit of public enterprises.

5. Excessive Government Control

It has been found that the government is always interfering in the petty decisions of public enterprise.
Decision making takes a long time due to the complex procedure in public enterprises.
major problems of public enterprises
Autonomous corporations were set up to avoid excessive government control in public enterprises.
It is, therefore, suggested that government control should not be diffused and dispersed over a wide area,
but there should be confined to basic issues and key points.

6. Mounting Losses
A review of the working of PSUs reveals that either their profits are deplorably low or they are making
losses.
The losses are mounting year after year.
Although some of the public enterprises are earning profits, the amount is very thin in comparison to
capital employed and our expectations.
The losses in public enterprises can be justified during the gestation period but afterward, they must try to
wipe out losses and earn profits.
The government should, therefore, make a case by the case study of the loss incurring enterprises and take
remedial, measures.

7. Political Interference
Public enterprises are becoming a means of fulfilling the political objective of political parties. They have
to serve the political interests of the ruling parties.
It has been observed that political factors influence decisions about the location of projects, appointments,
and even daily operations.
The location of the project is decided on the basis of political interest and not on the basis of the economic
viability of the project, resulting in incurring losses. .
This approach leads to considerable wastage of capital resources. Politicians are nominated on the board
of directors of public enterprises.

8. Under Utilization of Capacity

Public enterprise is facing the problems of underutilization of its installed capacity.
Thus, the capital resources are not fully utilized by public enterprise.
Therefore, it is necessary to find the causes of low capacity utilization and thus remedy the situation with
appropriate measures.
Shortage of power, inadequate demand, equipment breakdowns, inadequate raw material, managerial
inefficiency, etc. Are the major causes of underutilization of capacity.

9. Time and Cost Over-Runs

Most of the public sector projects take the long ester time to complete than was initially envisaged.
The cost of the projects also run upwards due to delay in completion of projects.
Poor and adequate project planning is the main cause of their delay in the construction time schedule and
an increase in cost.
Therefore, it is essential to prepare the completion of other project and an increase in cost can be
avoided.

10. Problems of Autonomy and Control

Public funds are invested in public enterprise and govt. It is responsible for the optimum utilization
of public funds.
At present, control is exercised by the finance minister and the minister in charge of the undertaking and
the parliament to check misuse of public funds.
Parliamentary control over the operations and capital development plans of public enterprises tends to
become quite rigid.

There is a need to provide greater functional autonomy in the management of public enterprises, so that
they may work efficiently, economically and enthusiastically.
Therefore, there is a problem of coordination between control and autonomy.

In order to provide more autonomy in parliament can help by not interfering in the working of public
enterprises.

11. Problems of Price Policy

Profit earning is not the main object of public enterprises.
They are operated for social welfare. If they indulge themselves in profit-making activities then there will
be no difference left between public enterprise.
Regarding price policy, public enterprises should adopt no profit any loss theory or the theory of
minimum profit.
So that they can maintain their relevance in the economy.
If they follow the below cost price policy, they have to bear losses and it cannot be justified.
If they charge heavy profits, then the social objective cannot be fulfilled.
Therefore, they have to keep in mind the social implications of price policy. In many cases, prices are
kept low even then the cost. This naturally affects their profitability.
This is very fine major problem of public sector.

12. Over Staffing

It has been noticed that in a most public enterprise, manpower is in excess of actual requirements.
Due to poor manpower planning, public enterprises are facing the problem of overstaffing.
There is a lack of proper education and training of the employees in the public sector.
Therefore, it is suggested to reduce the staff and top positions should be open to its employees.
13. Problems Of Over Capitalisation
Public enterprises are facing problems of overcapitalization.
The Input-output ratio in many projects was unfavorable. Defective project planning, lack of cost-
consciousness, underutilization of capacity, etc.
Are the main causes of overcapitalization in public understandings.
.
A study team has mentioned, “The causes leading to overcapitalization can be traced to inadequate
planning, delays and avoidable expenditure during construction, surplus machine capacity, tide aid
resulting in the combustion to purchase imported equipment on a non-competitive basis, expensive
turnkey contracts, bad location of projects and the provisions of housing and other amen ties on liberal
scale.”

14. Lack of Motivation

There is a lack of motivation in public enterprises. Employees get fixed salaries and other perks.
There is no reward for good work and no punishment for bad.
Thus, efficient and innovative employees are not motivated to do hard work.

15. Problems of Managerial Structure

Public enterprises are governed by a board of directors. All imported decisions are taken by the board.
Therefore, the success of the enterprise depends on the ability and efficiency of the members of the
board.
It is a difficult question, as to who should be made a member of the board of directors and what should
be his qualifications.
Politicians, bureau-craft, etc. Are nominated as a member of the board of directors in public enterprises.

16. Problems of Audit and Inspection

Although there is a system of audit and inspection in such enterprises, it is not followed in practice.
Accounts should be audited by the competent authority at least once a year. It should be seen that public
funds are not misused.
The audit department of government is already overburdened and the employees of the enterprise are
not cooperative.
Hence, it is suggested to appoint an expert committee that can audit the accounts of each public enterprise
to judge its efficiency.

17. Problems of Protection of Consumer’s Interests

As the number of public enterprises is increasing the problem of the protection of consumer’s interests is
also increasing.
Public enterprises are producing various consumer goods and providing various public utility services.
Therefore, public enterprises have to bear the responsibility to serve consumers interesting providing
quality goods in sufficient quantity at economic rates.
This will lead to control over the exploitation of consumers by the private sector.
The public sector acts as the monopolist in various sectors, therefore it is in a position to exploit
consumers. But the public sector is not run for the profit motive, it works for social service.
Therefore it is the responsibility of the public enterprises to look after the interests of the general public.
Objectives of PSU’s

In India, public enterprises have been assigned the task of realising the
objectives laid down in the Directive Principles of State Policy.

Public sector as a whole seeks: (a) to gain control of the commanding heights
of the economy, (b) to promote critical development in terms of social gain or
strategic value rather than on consideration of profit, and (c) to provide
commercial surplus with which to finance further economic development.

The main objectives of public enterprises in India are as follows:

1. Economic development:
Public enterprises were set up to accelerate the rate of economic growth in a
planned manner. These enterprises have created a sound industrial base for
rapid industrialisation of the country.

They are expected to provide infrastructure facilities for promoting balanced

and diversified economic structure of development.

2. Self-reliance:
Another aim of public enterprises is to promote self-reliance in strategic
sectors of the national economy. For this purpose, public enterprises have
been set up in transportation, communication, energy, petro-chemicals, and
other key and basic industries.

3. Development of backward Areas:

Several public enterprises were established in backward areas to reduce
regional imbalances in development. Balanced development of different parts
of the country is necessary for social as well as strategic reasons.
4. Employment generation:
Unemployment has become a serious problem in India. Public enterprises
seek to offer gainful employment to millions. In order to protect jobs, several
sick units in the private sector have been nationalised.

5. Economic surplus:
Public enterprises seek to generate and mobilise surplus for reinvestment.
These enterprises earn money and mobilise public savings for industrial
development.

6. Egalitarian society:
An important objective of public enterprises is to prevent concentration of
economic power and growth of private monopolies. Public sector helps the
Government to enforce social control on trade and industry for ensuring
equitable distribution of goods and services. Public enterprises protect and
promote small scale industries.

7. Consumer welfare:
Public enterprises seek to protect consumers from exploitation and
profiteering by ensuring supply of essential commodities at cheaper prices.
They aim at stabilising prices.

8. Public utilities:
Private sector is guided by profit motive. Therefore, it is reluctant to invest
money in public utility services like water supply, gas, electricity, public
transport. Therefore, the Government has to assume responsibility for
providing such services.
9. Defence:
Government has to set up public enterprises for production of defence equip-
ment. Supply of such equipment cannot be entrusted for private sector due to
the need for utmost secrecy.

10. Labour welfare:

Public enterprises serve as model employers. They ensure welfare and social
security of employees. Many public enterprises have developed townships,
schools, college and hospitals for their workers.

Role and Rationale of Public Enterprises

The public sector has been playing a vital role in the economic development
of the country. In fact the public sector has come to occupy such an important
place in our economy that on its effective performance depends largely the
achievement of the country’s economic and social goals.

Public sector is considered a powerful engine of economic development and

an important instrument of self-reliance. The main contributions of public
enterprises to the country’s economy may be described as follows:

1. Filling of gaps:
At the time of independence, there existed serious gaps in the industrial
structure of the country, particularly in the field of heavy industries. Basic
and key industries require huge capital investment, involve considerable risk
and suffer from long gestation periods.

Private sector concerns do not come forward to establish such industries.

Public sector has helped to fill up these gaps. The basic infrastructure
required for rapid industrialisation has been built up, through the production
of strategic capital goods.

The public sector has considerably widened the industrial base of the country
and speeded up the pace of industrialisation.

2. Employment:
Public sector has created millions of jobs to tackle the unemployment
problem in the country. Public sector accounts for about two-third of the total
employment in the organised industrial sector in India.

By taking over many sick units, the public sector has protected the
employment of millions. Public sector has also contributed a lot towards the
improvement of working and living conditions of workers by serving as a
model employer.

3. Balanced regional development:

Private industries tend to concentrate in certain regions while other regions
remain backward. Public sector undertakings have located their plants in
backward and untraded parts of the country.

These areas lacked basic industrial and civic facilities like electricity, water
supply, township and manpower. Public enterprises have developed these
facilities thereby bringing about complete transformation in the social-
economic life of the people in these regions.

Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri,

machine tool plants in Rajasthan, precision instruments plants in Kerala and
Rajasthan, etc., are a few examples of the development of backward regions
by the public sector.
4. Optimum utilisation of resources:
Public enterprises make better utilisation of scarce resources of the country.
They are big in size and able to enjoy the benefits of large scale operations.

They help to eliminate wasteful completion and ensure full use of installed
capacity. Optimum utilisation of resources results in better and cheaper
production.

5. Mobilisation of surplus:
The profits earned by public enterprises are reinvested for expansion and
diversification. Moreover, public sector concerns like banks and financial
institutions mobilise scattered public savings thereby helping the process of
capital formation in the country. Public enterprises earn considerable foreign
exchange through exports.

6. Self reliance:
Public enterprises have reduced considerably the need for imports by
producing new and better products within the country. These enterprises are
also earning considerable amount of foreign exchange through exports.

7. Socialistic pattern of society:

Public sector is an instrument for realising social objectives. Public
enterprises help to check concentration of wealth and private monopolies.
These enterprises can serve as powerful means of economic and social
change.

8. Public welfare:
Public enterprises help in the establishment of a welfare state in the country.
These enterprises supply essential commodities at cheaper rates.
A proper balance between demand and supply is created to protect consumers
against exploitation by profit hungry businessmen. Public enterprises also
protect and promote the interests of workers.

Criticism of Public Enterprises [Arguments against Public Enterprises]

Public enterprises are opposed on account of weaknesses in their organisation
and working. These enterprises generally suffer from the following problems:

1. Delay in completion:
Often a very long time is taken in the establishment and completion of public
enterprises. Delay in completion leads to increase in the cost of establishment
and benefits extracted from them are delayed.

2. Faulty evaluation:
Public enterprises are in some cases set upon political considerations. There
is no proper evaluation of demand and supply and expected costs and
benefits. There are no clear cut objectives and guidelines.

In the absence of proper project planning there is under- utilisation of

capacity and wastage of national resources.

3. Heavy overhead costs:

Public enterprises often spend huge amounts on providing housing and other
amenities to employees. Though such investment is useful for employees but
it takes away a large part of capital and the project suffers from financial
difficulties.

4. Poor returns:
Majority of the public enterprises in India are incurring loss. In some of them
the profits earned do not yield a reasonable return on huge investment. Lack
of effective financial controls, wasteful expenditure and dogmatic pricing
policy result in losses

5. Inefficient management:
Due to excessive centralisation of authority and lack of motivation public
enterprises are managed inefficiently. High level posts are often occupied by
persons lacking necessary expertise but enjoying political support.

6. Political interference:
There is frequent interference from politicians and civil servants in the
working of public enterprises. Such interference leaves little scope for
initiative and freedom of action. Public enterprises enjoy little autonomy and
flexibility of operations.

7. Labour problems:
In the absence of proper manpower planning public enterprises suffer from
over-staffing. Jobs are created to fulfil employment goals of the Government.
Guarantee of job in these enterprises encourages trade unions to be militant in
pursuing their aims.